There are many considerations to consider when you are thinking of making a loan. As an attorney, Nick Heimlich has advised many clients and potential clients about loans. To simplify, here is a list of considerations both from a legal and personal point of view as to loans.
1. Can I afford to lose this money?
Before considering making a loan, the potential lender should consider the possibility that the loan may not work out. If the loan goes bad, or the borrower fails to repay it, the lender could lose all of their money. If the answer to this question is that no, I cannot afford to lose this money, then you should not make the loan. Unfortunately, loans can go bad for a variety of reasons. The borrower may suffer a bad situation, like a job loss, business failure, or simply have a spending problem.
2. Why am I making this loan?
The motivation to make a loan is important. If you are just looking to help someone out, then make it a gift and be done with it. If the motivation is to make money, then proper due diligence on the loan is necessary.
3. Can a lawyer save my loan and make sure I get repaid?
No. Sorry to be blunt, but no lawyer can guarantee a result for a particular case. Even the most well drafted loan document carries risk that the loan does not get repaid. A lawyer can take various measures to lower your risk, but no measures can eliminate your risk.
4. What steps can a lawyer take to lower the risk for a lender?
A lawyer can make sure that your interest rate does not violate a usury statute (a statute limiting the interest rate for your loan to say 10% in California). This avoids penalties and increases the chance you get paid interest.
5. What other steps can the lawyer suggest?
A lawyer could advise you to get some security for your loan, like real estate, so that if the loan is not repaid, then you have the real estate as collateral.
6. Are there any other ways a lawyer can protect you?
Yes, a proper promissory note can be a big protection. You would be surprised how often clients come to me with a very minimal loan agreement that may lack basic terms, like interest rates, payment amounts, due dates, and other items.
7. What if I already have a loan that is bad and has not been repaid?
Then you should contact a lawyer. Depending on the amount involved, a lawyer may be able to file a lawsuit. Generally speaking, I handle disputes of more than $25,000. So, if you have an unpaid loan, you should seek legal help promptly.
8. Is there a time limit to file suit after a loan goes bad?
Yes. While each case must be carefully reviewed, there are some general time deadlines. In general, within 2 years of the breach (first non-payment) for an oral agreement a lawsuit must be filed. In general, within 4 years of a breach of a written agreement, a suit must be filed. If you fail to file a lawsuit within that time period, then you may lose your rights to recover.
